This is the executive summary which accompanied Dr Thibault Laurentjoye’s report Currency Options for an Independent Wales, commissioned by the Welsh Senedd.
THIS report delves into the potential currency pathways for Wales post-independence.
Notably, while much of the existing discourse, especially in relation to the Scottish conversation, centers on choosing between sterlingisation and an independent free-floating currency, we propose considering intermediary options. Wales is currently grappling with twin deficits – current account and fiscal – both of which official estimates place in the £13 billion to £15bn bracket, representing 15-20% of the Welsh GDP in 2022.
However, the accuracy of these estimates is questioned. Alternative calculations suggest a fiscal deficit at just over 3% of GDP by excluding items not aligned with Wales’ political needs or likely subject to renegotiation after independence.
Using the same logic, it would be possible to conclude that the trade deficit is smaller than the official figure.
The choice of a currency regime must take into account trade composition. Trade data from 2022 reveals that a significant portion of trade occurs with the UK (58% of imports, 50% of exports), followed by the EU (16% of imports, 29% of exports). Other major trade partners include the USA, Japan, Canada and China. After gaining independence, Wales would need to venture into issuing its own debt and borrow internationally, given its lack of foreign exchange reserves.
A current account deficit might exert downward pressure on a prospective Welsh currency, while using the pound sterling could choke the economy. Addressing the twin deficit involves options such as currency devaluation and internal devaluation, each reducing domestic purchasing power. Recognising that no choice is without challenges, we advocate for the introduction of a Welsh pound.
In evaluating the factors influencing such a currency decision, the most salient point is the advantage of controlling domestic asset yield fluctuations, particularly in public debt, through facilities like a lender of last resort and a market maker of last resort.
Conversely, arguments centred on transaction costs have diminished in significance due to the efficiency of contemporary payment systems, which have slashed inter-currency fees.
We also explore other considerations, including monetary and exchange rate strategies, especially given their implications for Wales. Before fully reaping the benefits of monetary sovereignty, it is imperative to redenominate certain balance sheet items, especially household mortgages which currently amount to £41bn.
This step will prevent them from becoming unmanageably large in real terms if the Welsh pound were devalued to enhance economic competitiveness. When it comes to currency options, the idea of sterlingisation, championed, for example, by the Scottish Government, entails using the pound sterling even in the absence of a formal agreement with the UK.
Adopting this approach may exacerbate the twin deficits, as it would deprive Wales of certain perks of UK membership while inheriting monetary challenges without the accompanying leeway in economic policy-making.
Similarly, we determine that eurozone membership might not be the optimal strategy in the short-term due to its stringent policy constraints. However, this observation shouldn’t lead to completely disregarding the euro.
It might play a role in determining the reference framework for the Welsh pound, for instance by being added into the currency basket used to anchor the currency.
We argue that the introduction of a Welsh pound post-independence would augment Wales’s economic independence. It would grant Wales the autonomy to enact desired policies and ensures fiscal resilience through the ability to tame market speculation.
This report offers guidance on crafting and overseeing a currency strategy. We touch upon foundational elements like central parity, fluctuation bands, crawling rate fine-tuning, currency basket choice, and the strategic release of pertinent information.
Regarding the roll-out, we envision a three-year plan. The inaugural year would see recruitment activities and the launch of a digital accounting unit. Year two would focus on upgrading operating systems to guarantee the seamless functioning of the new currency. By the third year, the currency would be introduced in its physical form, while specific financial obligations would be redenominated, aligning with the currency’s debut during independence.
Subsequent steps include potential devaluation or temporary flotation of the Welsh pound to invigorate the economy and bolster foreign reserves. We then advocate a phase of crawling peg or managed floating.
As Wales achieves a balanced or surplus current account and/or amasses substantial foreign reserves –a milestone likely years away –it could contemplate anchoring its currency value against a selection of currencies, determined by economic and diplomatic considerations.
